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Who Has Peer 2 Peer
By Jim Bruene on November 6, 1999 12:39 PM | 0 CommentsMost online business banking/cash management programs have featured ACH origination functions for many years. CompuBank was the first to put the service in front of retail users a year ago (OBR 10/98). Several other banks, including USAccessBank (OBR 2/99) have added the feature, but it’s still not widely available.
However, even the bank currently offering Web-based ACH origination are missing two key ingredients for the Net:
- bank account masking (for the recipient)
- email integration
We expect the Internet banking platform vendors (Digital Insight, S1, Online Resources, Q-UP, etc.) to quickly add this feature, both the straight ACH interbank transfer, and the more private person-to-person variety described here, to their retail offerings (probably in partnership with Checkfree and/or other payment specialists). Two years from now it will likely be an expected feature of a Net banking service. However, there is still time to jump in front of your peers by launching person-to-person payments in the next six to nine months.
Person-to-Person Revenue Streams
1. Transaction fees from sender and/or recipient
2. Funds conversion fees (moving money out of the digital cash system into real money)
3. Float income (like a prepaid cash card)
4. Abandoned funds (like travelers checks)
5. Currency exchange fees (translating money into different currencies)
6. Funds guarantee fees (good funds guarantee, like credit cards)
7. Escrow service fees (shepherding the delivery of the goods before releasing funds; like COD)
8. License fees from banks and others using the system
9. Sponsorship/advertising revenues
10. Revenues/commissions from credit lines attached to the P2P accounts
Source: Online Banking Report, 11/99
Business Model
One reason investors are excited about the person-to-person payment space is its ten potential revenue streams (see table below left). That’s nine more than many Web-based companies who rely solely on banner advertising.
Pricing: With 10 potential revenue streams, venture funding pouring in, and no first mover yet established (though it looks like Confinity will grab that position), pricing will likely be all over the board. But based on what we’ve seen leading Net companies do in the past, we predict that plain vanilla person-to-person payments will carry no explicit fees. Companies will instead earn revenues from value-added services such as (see example price schedule below): · good funds guarantee- rush payments
- large-dollar payment surcharges
Hypothetical P2P Payments Fee Schedule*
|
Service |
Fee |
|
transfer <$100 within 2 days |
free |
|
transfer >$100 within 2 days |
0.5% |
|
rush transfer (same day) |
0.5% (min. $0.50) |
|
funds guarantee* |
0.5% (min. $0.50) |
|
custom gift card (snail mail) |
$2.50 |
|
custom email message to recipient |
free |
|
reminder service |
free |
|
funds sent via prepaid cash card for ATM withdrawal |
2% |
|
confirmation when funds picked up |
$0.50 |
Source: Online Banking Report, 11/99
*see the table for an example using this fee schedule
Pricing Example*
|
Transaction |
Calculation |
Fee |
| send $75 in 48 hours |
n/a |
$0 |
| send $75 same day | 0.5% x $75 = |
$0.50 (min.) |
| send $300 in 48 hours | 0.5% x $300 = |
$1.50 |
| send $300 same day | (0.5% + 0.5%) x $300 = |
$3.00 |
| send $300 same day with funds guarantee | (0.5% + 0.5% + 0.5%) x $300 = |
$4.50 |
Source: Online Banking Report, 11/99
*using fee schedule from previous table
Business Case: If person-to-person payments roll out in a rational fashion (not likely, see Pricing on previous page), with providers pricing the service above cost and appropriate for its value, reasonable profits could be expected. With the price schedule outlined on the previous page, banks could expect annual gross revenue of $28 per customer and profits of $15 to $20 per year (see below for calculations).
Scenario: YourBank.com has 100,000 users. Each user makes two person-to-person payments per month, one for less than $100, which is free, and the other averaging $175. The split between same day and two-day delivery is 50/50. Ten percent opt for funds guarantee/insurance at an extra fee.
Results: As shown in the table below, a total of 2.4 million payments would be processed, 1.2 million of which would generate fees. Total fees collected would be $2.8 million, or $28 per customer. Variable costs would vary by bank, but shouldn’t be more than $5 to $10 annually per customer, resulting in gross profit of about $20 per year.
Revenue Calculations*
| Metric |
Calculation/Result |
| Total transaction volume | 100,000 x 2 x 12 months = 2.4 million |
| Transactions generating fees | 100,000 x 1 x 12 months = 1.2 million |
| Dollar value | 1.2 million times $175 = $180 million |
| Total fee revenue | $180 x 50% x 0.5% = $900,000 plus $180 x 50% x 1.0% = $1,800,000, plus $180 x 10% x 0.5% = $90,000 |
| = $2,790,000 | |
| Annual revenue | $27.90 per customer |
Source: Online Banking Report conjecture, 11/99
*optimistic scenario where competition does not drive the price to zero
